Take a Look at Tata Motors

Every day, when considering what to write about, I tell myself that I’m not singing enough praises about India. Then events demand that a topic more urgent be thrust upon these august pages. This is a major omission on my part, as friends, like Morgan Stanley Asia’s chairman Stephen Roach, believe that India will far and away outperform China over the coming decade.

So today I’m going to discuss Tata Motors (TTM), one of the world’s largest manufacturers of cars and trucks. Two years ago TTM made headlines when it bought Ford Motor’s troubled Jaguar Land Rover unit for a song, and then smartly turned it around by moving some production to India.But the real buzz around Tata has been about the Nano, at $2,000 the world’s cheapest car (click here for its site). A year’s production of 250,000 blew out the door in months, and construction of a second plant that can build an annual 350,000 units is underway. The company plans to upgrade it to meet US safety standards, and then offer it for sale here for $7,000, still a bargain. Do you think Toyota (TM) and GM might be worried?

The company has brought in an average 25%/year revenue growth rate for the past five years. That is a blistering rate for such a large company, with a market capitalization of $12.6 billion, which makes it one of the largest firms in the emerging markets outside of China. 2010 Q2 profits jumped to $433 million, versus a year earlier loss of $69 million. That has enabled the stock to punch through to a new all-time high.

You would think that with such a terrific story behind it, valuations would be through the moon. They’re not. Today TTM can be bought at a PE multiple of 12 times, and some forecasts put it as low as 8 times with a PEG ratio of only 0.40. Valuations tend to be generally cheap on the sub-continent because, well, it’s undiscovered. I would say buy on the next melt down, but you’re probably not going to get one. So buy on the next dip instead.